Reaction to RBI's Monetary Policy

India 4 October 2016; The policy rates have been reduced by 25 basis points to 6.25%. This rate cut delivery has happened for the second time in the current financial year, although after one round of rate cut in April, the current one is delivered after no change in the June and August policies. This shows that the central bank remains cautious in its monetary policies and is carefully monitoring the overall economic scenario before taking steps.

The first question that arises after this rate cut is, of course, how it will help improve buyer sentiment in the housing sector. The reason why housing sales have been sluggish is because of trust deficit between consumers and developers. Unless RERA and other pro-consumer policies come into play, buyers will continue to be wary. Therefore, we can expect only a marginal improvement in sentiment on the back of this rate cut. At this point, there is also no ready answer to the question of to what extent banks will actually pass on the benefit of the rate cut to borrowers.

From a larger viewpoint - globally, risk to inflation is on the upside as rising global liquidity could result in firming up of commodity and fuel prices, especially at a time when OPEC is contemplating a cut in oil production to cap further fall in crude prices.

On the domestic front from the food inflation perspective, conditions remain benign owing to good monsoons (at only 3% below the long-period average rainfall, this year’s rainfall was normal). However, there is marginal upside risk that could come from higher pay owing to effects of the 7th pay commission’s revisions as well as the expected rise in rural demand owing to good food grain production. It may be construed that lowering of rates going forward will, therefore, depend on such upside risks mitigating to a great extent.

For the construction sector, great relief is expected as steel and cement production has been robust as seen from latest industry production data. Therefore, rising cost pressure which haunted developers earlier may not be a major issue in the near-term.

The effects of the 7th pay commission revision on house rents is something which needs to be monitored further in order to ascertain its impact on the housing rents.

A further rate cut, the low-cost pressures on the construction industry and gradual revival of sentiments augur well for the real estate sector. However, for sentiments to witness a turnaround, stakeholders would continue to expect a sustained strengthening of the economic situation. RBI’s expectation of a 7.6% growth in the gross value addition is a positive one.